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FAREED ZAKARIA, HOST, GLOBAL PUBLIC SQUARE: This is GPS, the GLOBAL PUBLIC SQUARE. Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.

This, as you can tell, is a very special edition of GPS, coming to you from Davos, the small ski town in Switzerland that, for a few days each year is host to the World Economic Forum, bringing together leaders from business, government and society from around the world.

I've been coming here for over a decade. And every year, one can get a sense of what the global zeitgeist is, the mood of the times. And it is grim -- grimmer than I've ever seen it.

You might think that Barack Obama's inauguration and his first week in office, which were great global events, might have provided a sense of new beginnings and sunny skies. Well, it's sunny, but the economic meltdown has overshadowed all else.

There's a lot of frustration and anger with America -- not with Obama, not with the Bush administration, not with White House policy. There's a more general sense that American policies over the past two decades -- high consumption, low savings, excessive borrowing, lax regulation of banks -- are what has caused this worldwide meltdown.

Even though the banks in Europe were as guilty, everyone blames the Americans, because these problems are seen as American ideas and practices that other countries adopted.

Premier Wen Jiabao of China and Prime Minister Putin of Russia, in their speeches and in private meetings, attacked American policies openly and frontally, which is quite rare for heads of government.

On the show this week, since you couldn't make it to Davos, we're bringing Davos to you -- an in-depth conversation with Mohamed ElBaradei, the head of the world's nuclear agency, about Iran's nuclear program, Pakistani nukes and what to do about them.

But first, a unique opportunity. In just a moment, I'll be sitting down for a conversation with four world leaders from four different corners of the globe. They're all faced with frightening economic realities and are looking for some guidance, partnership from a new American president.

It will be a fascinating discussion. Stay with us.

(BREAK) ZAKARIA: Welcome, welcome, ladies and gentlemen. Thank you very much for joining us.

I should let you know, we also have a TV audience in this case. Don't mind the cameras. They'll find you.

This is an extraordinary opportunity that one really only gets at Davos, where we have four heads of government from literally four different continents, four corners of the world. And yet, they are all grappling with the same crisis, the same problem.

And what we're going to try to do is have a conversation about their perspectives on it and the road ahead.

I'm not going to spend a great deal of time introducing them, because they are extraordinarily well known: President Calderon is, of course, the president of Mexico; Prime Minister Brown of Great Britain; Prime Minister Han of South Korea; and President Motlanthe is the president of South Africa.

Let me start with you, President Calderon. What specifically at this point, what kind of international coordination is the key to get countries out of this economic crisis?

FELIPE CALDERON, PRESIDENT OF MEXICO: A really strong leadership is required. So, the first thing is leadership.

ZAKARIA: Who should that come from, President Obama?

CALDERON: Of course, Prime Minister Brown.

(LAUGHTER)

But also President Obama. And that would be a very important difference.

Now, the problem started in the U.S., the epicenter. And the problem coincided with the lack of leadership in that nation. Whatever the reasons were, now there is strong leadership in the United States. And the people need leadership in every single country, and especially in the American society.

And I think, in this particular moment, the new president of the United States has the opportunity to show his leadership to the nation and to the world.

And in each nation -- and let me say, in each enterprise -- we need to show the same courage. Stop blaming each other, or stop to think how bad we are in this Davos meeting. Start thinking what we need to do in order to move on, in order to overcome this crisis. And starting that, we will overcome the crisis.

(APPLAUSE)

ZAKARIA: Or as a president says, "Yes We Can." GORDON BROWN, PRIME MINISTER OF GREAT BRITAIN: Yes, 2008 will be remembered as the year that there was a huge financial crisis, which is as big as anything that has been seen in the world. But let 2009 be remembered as a year where the world came together to deal with the problem.

And people look back on the 1930s now, and with limited exceptions, people say that was a decade where people failed to rise to the challenge.

In this decade, we have got to rise to the challenge. We've got to rise to the challenge of international cooperation.

Look back on the '20s and '30s. Keynes went into the government of the day with plans to -- fiscal and monetary stimulus for the economy. The treasury secretary in Britain brought on it only three words to his plans -- inflation, extravagance and bankruptcy -- and rejected it out of hand.

Churchill then said, we will resolve to be irresolute, adamant for drift, solid for fluidity, all-powerful for impotence. Now, that's how that decade is remembered.

We actually have got this huge advantage, that we can cooperate with each other. Every continent can actually work together.

We understand the problems that are faced by each continent. There is not a lack of knowledge, a lack of communication, a lack of willingness to work together. Now, that is what this year we have got to do.

What we are seeing at the moment is thousands of people in every country of the world losing their jobs, thousands in fear of losing their homes, thousands of businesses going under. We can -- yes, your slogan -- yes, we can do something about it, and we ought to be working together.

(APPLAUSE)

ZAKARIA: Where are we in this economic crisis?

I think many people here seem a little bit perplexed as to how to think about this in terms of a timeframe. Are we in the beginning? Are we at the middle?

A famous British prime minister once said, this is not the end, this is not the beginning of the end, but it is the end of the beginning.

Are we at least at the end of the beginning?

BROWN: It may be trite to say this, but there is no one country that can solve this crisis on its own. And it's a far bigger financial crisis, because of how it's developed over the last few months. The word "credit" is derived from a Latin word "credo," which actually means belief or trust. And this is a crisis not just of credit, it's a crisis of trust in our financial institutions.

So, we are taking quite extraordinary measures -- so, too, are other countries considering them -- to ensure that the resumption of lending can take place.

ZAKARIA: Why is it not happening, Prime Minister Brown?

BROWN: Well, it's not happening, because there is a crisis of trust and confidence in the banking system. It's as simple as that.

ZAKARIA: But these banks feel they have mountains of so-called toxic assets. What do you do about that? How do you get those off the books?

BROWN: Well, that's what we're looking at the moment. The capitalization was the first stage of the process. What you've now got to do is look at how you can isolate the bad assets. But at the same time, while doing so, you've got to find other vehicles by which you can get lending to begin.

It is a crisis of confidence in the financial system. And it also comes back to issues about values, what values you respect.

And I think at this time, it's important to say that we reward work, we reward enterprise, we reward effort, and we reward responsible risk-taking. But we cannot reward or condone irresponsible risk-taking and excessive risk-taking, which has been what has happened in the past.

And so, the values that underlie our markets are important as well. We want free markets, but they cannot be value-free markets.

HAN SEUNG-SOO, PRIME MINISTER OF SOUTH KOREA: Frugality and thrift has to be the foundation of market economy. But unfortunately, there weren't many people who practiced frugality and thrift until now. I hope that when we have new architecture, new system, major CEOs would, some of them, practice these very important principles.

(APPLAUSE)

ZAKARIA: It is, again, another irony, I suppose, that Max Weber wrote about the Protestant ethic and the spirit of capitalism. And he said, as you said, Protestants are thrifty. He actually in that book says, Confucians...

HAN: Yes.

ZAKARIA: ... Asians are bad at capitalism.

And it now turns out, the only ones who save are the Confucians, and the Protestants spend like drunken sailors.

(LAUGHTER) Ladies and gentlemen, the floor is yours. Please ask a question. Make sure it is a question.

QUESTION: Thank you very much. I'm Arthur Mutambara from Zimbabwe.

There has to be a paradigm shift in the way we understand concepts that are based on the nation-states. Africans, for example, we want to be part of the casting and defining of global solutions to the current crisis.

To what extent are we incorporating African thinking and African responses to the global crisis? How global is our understanding of globalization?

ZAKARIA: A good question. President Motlanthe, you are now in the G-20. Do you feel you're at the table, your views are being heard? Do you want more? What would you like?

KGALEMA MOTLANTHE, PRESIDENT OF SOUTH AFRICA: At the moment, many, many developing countries feel that they do not have a voice at all, and that their views are never taken on board.

We've got to patiently put in place the building blocks to ensure that we build and consolidate democracies across the globe that subscribe to principles of transparency and accountability.

(APPLAUSE)

ZAKARIA: From Davos, Switzerland, the World Economic Forum, we'll be right back.

(COMMERCIAL BREAK)

ZAKARIA: Prime Minister Brown, you've talked a lot about the need for better global governance. But the problem often is that countries don't want to give up their sovereignty, and that this gets tangled up.

So, is -- I mean, how can you have a global governance without global super-national bodies that then are resented by people in your country and in mine, the United States?

BROWN: I think people are understanding, as a result perhaps of this financial crisis, that you've got global capital markets, you've got global financial flows, but you've only got national supervisors.

And then you find in a crisis, of course, that you've got a bank or a financial institution that is international for all its life until it finds itself in crisis. And then the only lifeline is actually national, not international.

The banking system failed. It froze up. It's got to be sorted out. There are ways to sort it out that we're talking about.

We've got a climate change problem. We can actually deal with it and solve it. We've got a problem about the use of energy. We can solve it. We've got a problem about poverty. That is a problem that can be solved.

So, rather than losing faith and allowing the protectionists to take over, or returning to an old, antiquated model of laissez-faire and say we can't do anything, we've actually got to grapple with these problems, find a way of internationally working together to do so. And I believe, here, we should have the confidence that, not only can we come through this particular crisis, but we can solve together, by working together, all the other problems that we know exist where international cooperation is absolutely vital.

(APPLAUSE)

ZAKARIA: Let's talk about that last danger you mentioned, prime minister.

President Calderon, one hears all this impressive array of activity. All these governments around the world are going to spend enormous amounts of money, fiscal stimulus. They've all read their John Maynard Keynes. They know what to do.

And yet, if you look at these fiscal stimuli, if you look at these various programs, it's a lot of subsidies to industries. It's a lot of what one would have called protectionism.

Is the movement toward free trade imperiled by this massive outlay of government support for various national industries?

CALDERON: The idea is to give an opportunity to the market to recover the real economy. And that was my message to the American president in our meeting in January. We need to provide or give an opportunity to the market. We need to integrate in a more competitive way our markets.

So, we need to reject protectionism.

ZAKARIA: You said this to President Obama?

CALDERON: Yes.

ZAKARIA: What did he say?

CALDERON: He was agreed that the benefits of trade in terms of job creation, in terms of investment, in terms of upgrading the competitiveness of the region, has been and will be very useful for both Mexico and the United States.

And we need to work together in order to take care about the protectionism threatening us in this particular moment.

ZAKARIA: How does it look to you, Prime Minister Han? Are you seeing the problems of rising protectionism?

President Obama, during the campaign, actually singled out South Korea as a place where American cars couldn't get sold, and that was one of the reasons why he was opposed to the South Korean Free Trade Agreement.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: And when it comes to South Korea, we've got a trade agreement up right now. They are sending hundreds of thousands of South Korean cars into the United States. That's all good. We can only get 4,000 to 5,000 into South Korea.

(END VIDEO CLIP)

ZAKARIA: You think -- you hope that this is going to work out all right?

HAN: Now, I think we have to promote trade investment at this juncture. Otherwise, we will suffer -- all of us will suffer. And hopefully that during the early part of the Obama administration, we would like to see this trade agreement passed through the House of Representatives as well as the Senate.

ZAKARIA: And signed by the president. You hope to convince him that you are right on this.

HAN: Well, I think, of course, President Obama has many priorities at the moment. We fully understand his problems at the moment. But we hope that this free trade agreement to the United States will be also beneficial.

ZAKARIA: President Motlanthe, there has been much elation in Africa about the election of Barack Obama as president.

Do you think that he can do something that will bring a greater degree of international coordination together, with the United States, the world's largest economy, playing some kind of an active role? What would you like to see?

MOTLANTHE: Well, for starters, he seems to be very keen to interact with other nations as equals. That in itself is a positive element. And I think it would enhance capabilities of mobilizing all nations, rather than talking down on other nations, and basically using the stick mode and the carrot.

We think he's a breath of fresh air.

ZAKARIA: President Calderon, when people talk about global cooperation, it all sounds nice. What does it mean? What would the average person understand it to mean? What would change, if we were to suddenly see a lot of global cooperation?

CALDERON: Well, the point is, we need that in order to fix the situation. And not only the economic or banking situation, because at the end, all the -- the economy usually is working on cycles. There is no boom forever, and there is no crisis forever.

But world cooperation means, well, the principles and values that we are defending. And Mr. Brown talked a little bit about environmental issues, talked about social development.

And in order to move ahead these challenges, we need to work together in order to fight extreme poverty in Africa or Latin America, in order to preserve -- or tackling climate change we need world cooperation, global cooperation. We need to think every day, what are the principles and values at stake.

And I think for a businessman, it's exactly the same questions. And the question is, are we going to face difficult moments or not? That is not the question. We are going to face any kinds of moment. The question is, do you have enough courage to face the challenge or not?

The state is back in. But do public servants have the knowledge to guide public policy through this difficult phase?

And second, is the leadership in the private sector up to the task of facing competitiveness in this era?

BROWN: Well, first of all, facing this crisis, all politicians are under huge pressure to define what the public interest really is, and to define the relationship between markets and the public sector. And I think that is the big task moving forward.

We've recognized that the old laissez-faire doesn't work. But we've also recognized from our experience of the 1780s, and even before, that state power is the wrong way of looking at things. So, we've got to find a better partnership between government and markets.

I don't believe that public servants should be running banks. I don't believe that to be the case. We don't want to own shares in banks longer than is necessary. And we cannot any longer say that it would be wrong for governments or the public interest to be upheld in situations where people are taking excessive and irresponsible actions, for fear that this is wrong -- it's wrong for the state to act.

We've got to find a way in which the values that we really believe in are upheld by the institutions in our society.

(APPLAUSE)

ZAKARIA: From Davos, Switzerland, the World Economic Forum, we'll be right back.

(COMMERCIAL BREAK)

ZAKARIA: President Calderon, Mexico went through its own pretty wrenching crisis in the early 1990s. What lessons should we learn from that? What would you recommend? You know, the United States is currently trying to decide on this good bank-bad bank issue, to have an aggregator bank, or whether outright nationalization is the right answer. What does Mexico's history tell us?

CALDERON: Well, first, you are right. We in Latin American countries suffered in the past several crises. Andres Velasco, finance minister of Chile, was saying last night that we suffered, like, over 30 crises in 25 years. So, we are experts in financial crisis.

(LAUGHTER)

ZAKARIA: Help us, for goodness sakes.

CALDERON: We can do something. For instance, one is -- yes, we have lessons. We learned from that. One is absolutely important with a sense of urgency, to save or to clean the banking system.

We did already, 10 years ago in Mexico. It cost like -- I don't know -- 15 or 20 points of GDP. But today, our banking system is really sound.

Well, the second is, the prime minister is right. You need to do something quickly with bad assets in the banks.

ZAKARIA: Prime Minister Han, let me ask you your lessons, because I'm struck by a certain irony. During the East Asian crisis, American policymakers, people from the IMF, went to East Asia. And as I recall, they had three pieces of advice.

They said, you must not prop up your bad banks -- because you also had a banking crisis -- you must keep interest rates high, and you must not spend a lot of money, because that will bust the budget.

And when confronting our own crisis, the Western world, we have decided to bail out the banks, lower interest rates to zero and spend vast amounts of money.

Were we wrong then, or are we wrong now?

(LAUGHTER)

HAN: Well, Fareed, Korea, as you said, went through financial crisis in 1997 and 1998. Unlike Latin America, which has gone through many crises, Korea has only once.

But I think Korea also has become an expert in dealing with financial crises.

And according to our own experience, whatever measures we take, it has to be fast, decisive and sufficient.

ZAKARIA: But prime minister, is the lesson there then that Western countries should also take a little bit more pain, that is, to force more restructuring? Right now what we're doing is an attempt at a kind of painless recovery. The government is pouring huge amounts of money, and the Fed is taking on trillions of dollars on its balance sheet.

Should we follow our own advice from '96, '97?

HAN: I think what you are doing now is also very painful to the people, because, if we are spending public money, then that comes from the taxation. Therefore, whatever the government measures to reorganize the financial sector through the public spending, ultimately it will be very, very painful, because people have to pay through taxes.

ZAKARIA: Prime Minister Brown, can I ask you to pick up on the point that Prime Minister Han made about the pain?

BROWN: I mean, you know the great story that's told about the Chinese president going to God to get advice, and asking, you know, when will climate change be solved. And God says, not in your lifetime, perhaps not ever. And he goes away.

And then the American president goes and says, when will there be world peace? And God says, you know, not now, not this year, not next year, perhaps not in your lifetime.

And the president of Europe goes to God and asks, when will the international financial institutions work. And God cries.

(APPLAUSE)

ZAKARIA: And ladies and gentlemen, we are out of time. I think that my summary of the panel is another Churchill quote. How can one not do it?

One of the most optimistic speeches in the English language begins by saying, "I have nothing to offer you but blood, tears, toil and sweat."

(LAUGHTER)

So, I think we all have to get to work. Thank you very much.

(APPLAUSE)

(COMMERCIAL BREAK)

ZAKARIA: Mohamed ElBaradei, the director of the IAEA, the International Atomic Energy Agency, has won the Nobel Peace Prize, and he has been monitoring Iran's nuclear development, North Korea's, as well as dealing with all the nuclear issues that confront the world.

Thank you for joining us.

MOHAMED ELBARADEI, DIRECTOR, INTERNATIONAL ATOMIC ENERGY AGENCY: A pleasure to be with you, Fareed.

ZAKARIA: Tell me first, what is the status, as far as you can tell, of Iran's nuclear capacity?

ELBARADEI: You know, Iran is not on the threshold of having a nuclear weapon tomorrow. They are now having a substantive amount of low enriched uranium. But that doesn't mean that they are going tomorrow to have nuclear weapons, because as long as they are under IAEA verification, as long as they are not weaponizing, you know.

ZAKARIA: You have seen some intelligence reports that Iran is actually quite close to being able to enrich the kind of uranium they need to weaponize. You do not believe that.

ELBARADEI: Well, no, you can have all sorts of different scenarios, Fareed.

I mean, for example, you can say that they have now enough low enriched uranium, you know, which, if they kick the inspector out, they can turn it into high enriched uranium, and then they can weaponize it. Yes, sure. They can do that, you know.

But there is a lot of "ifs" there. I mean, there is a lot of -- if you assume that they are going to walk out of the nonproliferation regime, you assume that they are going to, you know, go for a nuclear weapon, that they have the capacity, capability, knowledge to weaponize quickly.

You know, but even if I go by the CIA and other U.S. intelligence, I mean, the estimation that, even if they go through all the scenarios, we are still talking about two to five years from now.

So, that's what I'm saying. Yes, there is a concern. But don't hype the concern. There is ample time to engage them and reverse the concern, and move into more engagement rather than more isolation.

ZAKARIA: If you were advising President Obama, what would you say his first move should be with Iran?

ELBARADEI: I think his first move he already did, it is to stretch his hand. And I call on the Iranians right now -- and I've talked to them here -- that you really need to reciprocate, you know. You need to also show goodwill. You need to take a couple of good steps that are showing goodwill -- for example, a proposal for suspension or implementation of the additional protocol. Work with the agency in a more transparent way.

The first step is mutual engagement based on respect. And then, everything else will have to follow.

Unfortunately, for the last six years, the policy that has been pursued has failed. So, we have to think of a different approach.

And I'm very happy and glad, and hopeful that President Obama understood that very well, that you need -- if you have a problem, you need to talk to the people. You need to engage, you know.

These are all common sense, but we have not been practicing that for the last seven, eight years. And as a result, today, we have to start from a new beginning.

ZAKARIA: Let's talk about what these negotiations might look like. You have spent a lot of time negotiating with the Iranians. From the outside, it looks they are tough customers.

ELBARADEI: Oh, they're very tough customers. I mean, they have, I always say, and they have 1,000 years of experience as "bazarris." They know what to ask for, what is the right price. And they are...

ZAKARIA: And they negotiate the price up to the last minute.

ELBARADEI: Oh, yes. Absolutely. And they are very good at that, and they are very clever negotiators. And they think strategically, unlike the Arab world, where there is an emotional reaction.

In Iran, it's a very strategic thinking, long-term thinking, which is -- again, I admire them for that. But it is not going to be easy.

And the negotiation will have to cover, primarily, their security. I mean, there is a sense of insecurity, whether you think of Iran regime as a theocracy, a democracy. Every regime -- for them, regime survival is number one priority.

ZAKARIA: Well, and they are surrounding by nuclear weapon states...

ELBARADEI: And they are...

ZAKARIA: ... Russia, China, India, Pakistan, Israel.

ELBARADEI: All of them, and 150,000 American troops. So, one has to understand they have a sense of insecurity. We have to address their sense of insecurity.

They have been called Axis of Evil. They have been -- you know, there has been money allocated for regime change.

So, put yourself in their shoes. I mean, there is insecurity. Whether you agree with their ideology, you hate their ideology, that's a different matter.

But they have to, you know, to protect themselves. It's a -- fundamentally, it's a security issue. It's a competition of power between the U.S. and its ideology and Iran, which obviously have a different ideology.

Well, you need to reconcile your differences. You need to put all your grievances on the table. The grievances go back from -- until 1953, when the CIA toppled the first nationally elected president of Iran, President Mossadeq. Then we came to the hostage crisis. Then we came to the nuclear crisis.

And we need to do a lot of work to put all this on the table and build trust. I mean, it is not really about -- many other countries are enriching uranium without the world making any fuss about it. Why are we making a fuss about Iran?

ZAKARIA: But isn't the argument that the Iranians lied to your agency for almost a decade? And that, therefore, there is deep distrust about Iran's intentions.

ELBARADEI: I fully agree with that. They did not tell us the truth. They should have reported to us what they have been doing.

And I always said that there is a confidence deficit. And Iran has to go out of its way to build confidence by opening up with the agency, provide maximum transparency. And right...

ZAKARIA: But are they doing that now?

ELBARADEI: No.

ZAKARIA: In your last report you said they were not.

ELBARADEI: No, no. They are not.

ZAKARIA: Now, you know what Condoleezza Rice's argument about the negotiations is. It is that, if the United States were to negotiate without preconditions with Iran, the Iranians would use the negotiations as a way to run out the clock, as they say, that is to continue enriching and keep the negotiations going, all the while enriching. And that therefore, that the negotiations would become an end in and of themselves, because that would be the cover through which the Iranians would enrich.

Do you agree with that?

ELBARADEI: If you don't talk in time of crisis, things definitely get much worse. Let us take North Korea. North Korea, as long as we were talking to them after the agreed framework, during the Clinton administration, they didn't have a bomb. We stopped talking to them during the Bush administration. They developed a bomb.

Iran, you know, we did not talk to them, because we ended up Iran having mastered in the technology.

Hamas, we tried to quarantine Hamas and quarantine 1.5 million civilians. We ended up with a carnage, a slaughterhouse in Gaza.

So, I don't really buy that argument in general. You know, no matter how your grievances, you have to talk. You have to talk.

Talking, as we know, also -- you know, once you talk to your enemy, it creates a sense of moderation. I mean, yesterday's terrorists are today prime ministers and presidents. We know that. This is reality. This is fact.

But if we talk to Iran, specifically, of course, if you start the negotiation, we have to freeze the activities. I mean, there has been a number of proposals on the table for a freeze for free, that Iran, as a condition -- not as a condition, but at least as prelude to negotiations -- Iran should freeze its enrichment activities.

The international community should freeze its sanctions. And then, let us start and look for the grand bargain.

ZAKARIA: And you think the Iranians would agree to that.

ELBARADEI: I think there is a good -- there is a good possibility that they agree to that. In my experience with the Iranians over the last few years, they were ready at different times to agree on a freeze. However, at that time, the Bush administration insisted that they have full suspension, which I knew, you know, for the last few years, it was not going to happen.

ZAKARIA: And we will be back with Mohamed ElBaradei.

(COMMERCIAL BREAK)

ZAKARIA: We are back with Mohamed ElBaradei, the director of the IAEA.

When you look at a country like Pakistan, how do you think about it?

Here is a country that has nuclear weapons, that is somewhat unstable, that is in a difficult economic situation, who has a very troubled border with Afghanistan. And you can't get in, because they have not -- they will not allow the IAEA in.

What do you think we should do?

ELBARADEI: Well, what I would do is, I echo what Barack Obama has said, that we need to get rid of nuclear weapons worldwide.

I think the idea that 20 years after the end of the Cold War, we still have 27,000 warheads is insane to me. The idea that we have weapons, you know, deployed between the U.S. and Russia that could be launched in a matter of minutes is insane to me.

The idea that nuclear power is still the road to -- a nuclear weapon is the road to power, prestige, influence, protection -- is, again, an environment that we need to change.

I mean, we just talked about Iran. I mean, Iran feels that, if they have at least the know-now -- not necessarily the weapon -- they will buy themselves an insurance policy. They talk about that this is for economic reasons, commercial reasons. But I have no doubt this is an insurance policy.

ZAKARIA: Do you worry, with the instability in Pakistan, that the nuclear weapons, their nuclear arsenal could fall into the hands of terrorists?

ELBARADEI: I mean, the idea of a terrorist -- I mean, that is to me, today, is the most serious danger the world is facing. There is always a risk everywhere in the world. And let's cross our fingers.

I mean, you saw what happened in the U.S., the lapses in command and control a number of times, when a number of aircraft flew over the entire U.S. with nuclear weapons, without anybody knowing about it.

We need to -- you know, if we need really to protect ourselves long range, we need to get rid of these horrible weapons.

ZAKARIA: And you think that that possibility, of a terrorist acquiring a nuclear weapon or low-grade enriched uranium is large enough -- is a very real possibility?

ELBARADEI: It is a real possibility. I mean, definitely, having a power for radioactive source is a very real possibility

And exploding the so-called "dirty bomb," you know, through a conventional explosion in a big urban center, it is not a nuclear explosion, but it will kill thousands of people. It will create grave economic dislocation, and it will terrorize people.

That is a very, very serious...

ZAKARIA: What about the possibility of people getting hold of what are called "loose nukes" in Russia? Is that...

ELBARADEI: Well, I think we are trying to help in this domain by making sure that all nukes, all nuclear materials are in the best physical protection.

But -- I always say and I continue to say -- we haven't done the job yet, and we're still in the race against time.

ZAKARIA: Do you think there should be a much-expanded version of this program?

ELBARADEI: Oh, a much expanded version of program. Much more money should be poured in that program. This is the number one priority in my view, Fareed.

ZAKARIA: There are two countries that have developed nuclear programs, that are not part of the NPT -- if you accept the Indian renegotiation as complete -- and they are Pakistan and Israel.

How should they be treated? And should they be treated the same way?

ELBARADEI: I mean, I always have been saying for years, that these three countries should not be treated as a pariah, but...

ZAKARIA: That's India, Pakistan and Israel.

ELBARADEI: ... yes, Pakistan and Israel -- but should be treated as a partner.

I cannot treat India as a pariah. You know, one-sixth of the world population cannot be treated as a pariah. They have to be engaged in every arms control measure.

And I was very happy -- I was very supportive of the India agreement, because it brings India together into the mainstream. And we have to do that with Pakistan. We have to do that with Israel.

Israel, of course, is much more problematic, because of that whole turbulence in the Middle East. But we still have to -- there are different solutions. India and Pakistan's solution will have to be within the global arms control. Israel's solution will have to be within a nuclear weapon freeze in the Middle East as part of a peace process.

ZAKARIA: Do you think the Israelis would ever accept that?

ELBARADEI: If they don't accept it, I mean, Iraq and Libya are not going to be the last countries in the Middle East to be tempted to develop nuclear weapons. And the technology is out of the tube. It is not possible now for other countries to do it.

So, it's a question. Again -- and I had a couple of years ago, or three years ago, a discussion on that issue with the prime minister of Israel, Sharon. And I told him, you are not really protected right now, because the danger is not another country in the Middle East acquiring nuclear weapons, but a terrorist group acquiring a nuclear weapon.

And the solution is mutual cooperation among countries in the Middle East and a peace process. So, nuclear...

ZAKARIA: What did he say? What did...

ELBARADEI: I think he took that point on board, that he understood that the threat of nuclear terrorist is really much more serious, much more imminent than another country having nuclear weapons.

ZAKARIA: And your argument is that all Israel's nuclear weapons don't deter it, because the terrorists would be happy to die.

ELBARADEI: They don't deter. In fact, they create a sense of impotence in the whole Arab world.

ZAKARIA: Do you think Saudi Arabia and Egypt are thinking about a nuclear option, if Iran gets nuclear weapons?

ELBARADEI: I don't think so. I don't see any indication of that. I think they understand that nuclear threat in (ph) more than assure (ph) right now. But they are very worried about the instability of the Middle East.

I think any change of regimes in the Middle East is not going to happen because of a country acquiring nuclear weapons. Nuclear weapons aren't going to protect you against internal dissent. It's not going to protect you against domestic revolution.

I mean, you cannot use nuclear weapons. You know if you use nuclear weapons, you will be wiped out of the face of the earth.

So, I think nuclear weapons are a relic of the past. And that's why I am very happy to see more and more countries finally discover what I have been saying for a number of years, that we need to get rid of these weapons and try to build a new security system that does not rely on nuclear weapons, but look at the roots of why countries feel insecure.

ZAKARIA: So, talk about that for a moment. Do you really think that you can imagine a world in which the United States, Britain, France and Russia have no nuclear weapons?

As I said, it is not going to happen tomorrow. But why do we have 27,000 warheads? I mean, a lot of experts are talking now about reducing that, slashing that number to 500 each, for example, Russia and the U.S. These are enough to, you know, pulverize the world many times over.

It is not going to happen overnight, but we have to put -- you know, we have the ingenuity to build a system that does not rely on weapons of mass destruction. I mean, that -- it's about time in the 21st century to have a world that is sane, that is safe, that's humane.

And it is not -- I don't have a guarantee that is going to happen, but we have to continue to work for it.

ZAKARIA: We've spoken many times in the past, and you have often seemed quite pessimistic. Are you optimistic? You sound more optimistic these days.

ELBARADEI: I am very optimistic, Fareed, I can tell you.

For the last at least 10 years, I have been very pessimistic.

For the first time, I have an opportunity -- I have the opportunity for a new beginning. I have -- for the first time I see people speaking common sense, the importance of dialogue, the importance of international institutions, the importance of a fair and equitable solution to festering conflict.

And I think we have an opportunity. The important thing now is to act on it.

So, yes, I am optimistic. And I hope at our next interview, I still have my optimism.

ZAKARIA: Mohamed ElBaradei, thank you very much.

ELBARADEI: A pleasure to be with you, Fareed. (COMMERCIAL BREAK)

ZAKARIA: As always, my question of the week. But first, your answer to last week's question.

I asked you if you thought the United States should negotiate with the Taliban. Not surprisingly, we got a strong response.

Many of you felt that, after the Taliban's brutal treatment of women and its association with al Qaeda, we should never consider talking with its leadership. But even more of you, a majority, felt that we will never change the situation in Afghanistan without engaging the Taliban.

And for next week, here's what I want to ask you. One year from today, when world leaders and CEOs once again gather here at the World Economic Forum, do you think we'll have been through the worst of it?

Will the financial crisis be on its way to resolution? Will economies be recovering? Or could things be still as bad or worse?

Now, before I go, I want to recommend a book -- George Freidman's "The Next 100 Years: A Forecast for the 21st Century."

Friedman runs a private intelligence agency, which some have dubbed the "shadow CIA." And in this book, he tells the future, specifically, speculating on the major world events of the 21st century. It's fascinating.

And remember, as always, you can e-mail me at fareedzakariagps@cnn.com. And please check out our improved and ever- expanding Web site at cnn.com/gps.